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Whether you're buying or selling a home, a title company is often a major player in the process. Some of the roles of a title company include verifying the title's history and potential claims, issuing title insurance, providing closing services and holding certain funds in escrow until they're ready to be disbursed.
Here's what you need to know about what a title company does and what to expect when working with one.
What Is a House Title?
A house title is a legal concept that refers to the legal rights of property ownership. More specifically, a title gives a homeowner the following rights:
- Right of possession
- Right of control
- Right of use and enjoyment
- Right to allow others a right to use
- Right of transfer through selling, gifting or inheritance
- Right of privacy and exclusion of others
- Right of collateral for a mortgage
Keep in mind, though, that these rights may be limited by laws, easements, liens and homeownership association (HOA) rules.
When buying a home, the seller will transfer these ownership rights to you via a physical document called a deed. The deed is then filed with the county government to maintain a record of the property's title.
What Is a Title Company?
Title fees often make up a large chunk of your closing costs, so it's important to understand what they do and why it's important.
A title company is a third-party company that works with homebuyers to ensure that the house title is transferred smoothly and legally.
In particular, a title company will work with you, your real estate agent, the mortgage lender and the local government to provide a variety of services in a real estate transaction, including a title search, surveys, title insurance and various closing and escrow services.
Roles of a Title Company
Once you're under contract to buy a home, you'll need to find a title company to help complete the transaction. The title company takes on several roles during the mortgage process.
Verify the Title
The company will conduct a title search to establish the property's complete ownership history, also called the chain of title. The process involves searching public records for anything that could impact the buyer's right to ownership, including:
- Additional owners
- Outstanding mortgage loan and other debt secured by the home
- Unpaid property taxes
- Income tax liens
- Contractor liens
- Easements that give others certain rights to the property
- Leases
- Restrictions (such as communities that prohibit owners under a certain age)
If the title company finds anything that could impact your claim to ownership, the mortgage lender will typically require you to resolve the issue before closing on the loan.
Perform a Property Survey
A property survey verifies the property lines and confirms that your and your neighbor's structures aren't encroaching on each other's properties.
Depending on where you live, you may or may not be required to complete a survey when buying a home. That said, a title company may still require one for insurance purposes, particularly if the seller hasn't had one completed recently.
Even if it's not required, it may be good to request a property survey to protect yourself from potential issues with neighbors in the future.
Hold Money in Escrow
When entering a contract with a seller, you may be required to provide earnest money, which the seller can keep if you back out of the contract after the due diligence period expires. The title company will hold on to this money and, if you go through with the contract, put it toward your down payment and closing costs.
At closing, you'll need to provide the title company with your down payment and closing costs, which will hold the funds in escrow until it's time to transfer them to the lender and other parties involved.
Perform Closing Services
Title companies also typically offer settlement services, including preparing documents, appointing a notary or real estate attorney to review them and scheduling your closing.
Once you've completed the closing process, the title company will finalize the title transfer by filing the deed with the necessary county official.
What Is Title Insurance?
While a title search and property survey are usually sufficient to suss out potential issues, they're not foolproof. After completing the transaction, falsified documents, clerical errors, unknown heirs and property line disputes can all threaten your title to the property, even years down the road.
As a result, title companies offer two insurance policies, one for the lender to protect its interests and one for you to protect yours.
Your lender will typically require you to buy the lender's title policy, but the owner's title policy is optional. That said, it's generally a good idea to get it, and in some states, the seller will be the one to pay for it.
Title insurance is paid for with a one-time premium—included in your closing costs—which costs between 0.5% and 1% of the purchase price of the home.
How to Choose a Title Company
Your real estate agent may recommend a title company for you to work with, but it can be a good idea to shop around to ensure you get the best service without being overcharged. Steps to finding a good title company include the following:
- Ask for a referral. If you trust your real estate agent, you can save some time by working with their preferred title company. If not, consider asking friends and family members for recommendations based on their experiences.
- Research online. Before reaching out to a title company, do some research online. In particular, look for customer reviews so you can get an idea of what you can expect.
- Ask questions. Once you're ready to contact title companies, ask questions about which services they offer, what their title search process looks like, how much they charge and which internal controls they use to keep your funds safe.
- Verify ownership. Additionally, you'll want to make sure that the company is a neutral third party—some title companies are owned by lenders and real estate companies—and whether they're a local company that knows the area or is owned by a national firm that outsources its services.
Since you'll likely close at one of the title company's locations, you'll also want to make sure it has offices nearby. If not, ask whether they offer alternative locations for closing.
Frequently Asked Questions
Generally, the homebuyer will choose the title company. However, if the seller has a strong objection, they can counter with another option. If the seller is paying for both title policies, the seller may have the right to choose the title company.
It's not required by law to work with a title company during the mortgage closing process, but lenders typically require it to protect their interests.
The title company will work with your lender to put together documents for closing. When you're ready to close, you'll typically need to provide proof of identification, such as a driver's license or a passport, and proof of homeowners insurance.
Depending on your situation, you may also need to bring a divorce decree or separation order and trust documents if you want to designate the trust as the owner—though you can also change the title later on.
You'll also need to provide the funds for the down payment and closing costs. While some title companies accept a cashier's check for smaller amounts, most will have you wire the money on the closing date.
The Bottom Line
Title companies perform several key roles during the homebuying process, primarily to make sure that the process of transferring the title to the property—and the rights that come with it—goes smoothly.
Your lender will typically require you to work with a title company, but you can usually choose which one you work with. Take your time to shop around and compare services, fees and other factors that are important to you to ensure a good experience.